Scottish businesses could save tax and encourage employee ownership

John Cairns

The firm was commenting in the week when another hotel (Priory Hotel in Beauly) utilised an employee ownership trust (EOT) to transfer ownership of the business to its employees.

EOTs were introduced in 2014 as a means of saving business owners’ capital gains tax (CGT) whilst also encouraging employee ownership of a business. It allows owners an exit from the business and enables the existing employees to take control of their destiny and continue to operate a business they understand and know. The EOT must acquire more than 50 per cent of the ordinary share capital and voting rights of the company and must be applied for the benefit of all eligible employees on the same terms.

In Scotland there are around 100 employee owned companies with turnover of £940m and with over 7,000 employee owners. The Scottish Government established a new body to encourage this under the name Scotland for EO (employee ownership) in September with the ambition of creating 500 employee owned companies by 2030.

John Cairns, tax partner with French Duncan LLP, explained: “An EOT is a win-win idea benefitting business owners and their employees. It allows the owner to exit the business without a hefty tax bill whilst leaving it in the hands of people they know well, who understand the company, and will take the business forward under their control.”

“The principle goes far beyond the annual tax-free bonuses for all employee/owners of up to £3,600 and gives them a stake in the company and the opportunity to control their destinies. It also provides continuity for the business for its customer base as they will continue to deal with the same people, providing the same service or product, in the same geographical location. This system allows more Scottish businesses to remain in Scottish ownership to ensure a more stable future.”

Mr Cairns continued: “Any change in business can cause instability and uncertainty. An EOT allows for a business to change hands with minimal change although allowing the new owners (the employees) the opportunity to stamp their own ideas on the company.”

“Many businesses are sold to new owners who are geographically distant, whether in another part of the UK or abroad.  This can lead to a disconnect with the community the business is based and the potential for decisions being made without a full understanding of the local needs and business issues. A distant owner may be more likely to consider transfer of work abroad and, at the extreme, complete closure of the business which has been acquired, in its traditional location, with a loss of jobs.”

Mr Cairns, concluded: “While it would be wrong to suggest that EOTs are good for all businesses they are a positive option for a great number and offer the chance for owners to benefit from the tax savings but also ensure that the business they created is carried on by the people they know. I think considerably more business owners should look at this exit option in the future and I would hope that, rather than 500 employee owned businesses by 2030, we should look at a more ambitious target and be able to get double that number in the next five years.”